Subprime lenders struggle with arrears

By Eric Johnston

INTEREST rate cuts may have come too late for home borrowers already behind in repayments, with the rate of arrears across the nation's housing market tipped to rise further as the economy cools.

Lenders such as Adelaide Bank, Challenger Financial, Liberty Financial and Bluestone will be hardest hit by the losses after funding billions of dollars of loans to higher-risk borrowers over recent years.

The latest analysis of the nation's mortgage market by ratings agency Standard & Poor's shows that more than 15.3 per cent of loans issued to so-called subprime borrowers remain in arrears. The bulk of these are more than three months overdue — the most severe category before banks and other lenders class a problem loan as being in default.

While losses on subprime loans remain at their highest since Standard & Poor's began tracking the market early last decade, the latest arrears figures — to the end of the September quarter — are slightly down from a peak of 15.7 per cent in June. Still, Standard & Poor's is warning of a rocky year ahead for specialist subprime lenders.

"The dramatic cut in interest rates could help some subprime borrowers; however, their record of arrears recovery is poor once they fall into 90 days or greater," the ratings agency said in its latest analysis of the mortgage-backed securities market.

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This is because the borrowers are less likely to refinance their loan because of the limited financing options available.

Even with official interest rates slashed by 3 percentage points since September, seasonal factors are expected to add pressure on arrears, with the rate of missed payments increasing in the months after Christmas, Standard & Poor's said.

About 17.8 per cent of Bluestone's subprime loans are in arrears, compared with 18.5 per cent for Challenger and 18.3 per cent for Liberty, the figures show. While the local housing market has cooled, few are expecting the turmoil in the US housing market to be repeated here.

Analysts maintain there is a relative shortage of Australian housing stock, while rising interest rates over the past three years have led to a sustained slowdown in borrowing.

At less than $5 billion, the Australian subprime mortgage market is just a fraction of the size of that of the US, which remains at the heart of that nation's financial woes.

For lower-risk borrowers, most problem loans are clustered in low-documentation loans, or those who have trouble proving a regular income source, such as the self-employed. Here, arrears reached their highest level on record in the September quarter, 3.6 per cent, up nearly 0.7 percentage points from the June quarter.

Arrears on full-documentation loans — regarded as the lowest-risk form of loans — eased to 1.22 per cent in the September quarter, falling from a high of 1.3 per cent in June. The average rate of arrears for major banks is running at just 0.9 per cent of issued loans.

Although the Standard & Poor's figures track the performance of residential mortgage-backed securities, they are generally regarded as a key barometer of the health of the broader Australian housing market.